Systems and methods for providing financial services

ABSTRACT

A new method and system for providing financial services is provided. These methods and systems can include providing banking and investment services to hedge fund money managers and other customers without the assistance or need for a prime broker. While employing the present invention a money manager may receive prime brokerage services from a bank or other financial service while at the same time be able to pursue investment opportunities with this bank or financial institution and other banks, institutions, and brokerages. The prime brokerage services that a money manger may receive can include accounting services, loan services, and cash management.

CROSS REFERENCE TO RELATED APPLICATIONS

The present application is a continuation of U.S. Ser. No. 11/740,663,filed Apr. 26, 2007, now allowed, which in turn claims the benefit ofpriority of provisional application Ser. No. 60/894,361, filed Mar. 12,2007. Both applications are hereby incorporated in their entirety byreference.

FIELD OF THE INVENTION

The present invention generally relates to financial services. Morespecifically the present invention relates to systems and methods forproviding banking or investment brokerage services to money managers andother customers.

BACKGROUND

A fundamental service offered by a financial institution is to act as arepository for a customer's investments and to account for thedistribution and growth of those investments. The financial servicesoffered by a prime broker to a hedge fund are an example of suchservices. As is often the case in this relationship, a prime brokerprovides and services a single or main account in which a hedge fund maymaintain all of its cash and securities. By providing these services toa hedge fund money manager, the prime broker can allow the money managerto focus on the investments in the hedge fund rather than attending toaccounting or banking details necessary to operate the fund. A primebroker may also offer other services to the hedge fund. These caninclude cash management, reporting, and money lending.

In theory, a money manager of a hedge fund will be able to trade withseveral brokerage houses while maintaining a single account at the primebroker. By relying on these banking services from a single prime broker,a money manager may be freed to work with several brokerage housesrather than having to rely on a single brokerage house to provide all ofthese services. An advantage of maintaining relationships with severalbrokerage houses is that the money manager may learn about businessopportunities, including IPOs, from several sources.

The origins of a prime brokerage account are commonly thought to dateback to the late 1970's. Over the years the products offered by theseprime brokers have changed, from a largely equity based product to morediverse services. These may include fixed income and derivativeofferings, and foreign exchange and futures products. In each instance,these prime brokers have been separate entities apart from the brokeragehouses and apart from the hedge funds that the money managers work for.

Today, prime brokers offer services in a competitive industry with highdemands from the hedge fund industry. These prime brokers may generaterevenues from commissions and fees on transactions, from spreads onloans, and by sophisticated financing products such as swaps and CFDs(Contracts for Difference). In some situations the prime broker may beexposed to loss if collateral held to secure loans falls below the valueof the loan and the loan defaults. There are other risks as well.

Although commercial banks may make available to their clients a varietyof discrete services that overlap with some of the specific servicesprovided to hedge funds by prime brokers, as a general matter they havenot sought to provide such clients with an integrated set of servicesreplicating all of the services normally provided to a hedge fund by aprime broker.

BRIEF SUMMARY OF THE INVENTION

The present invention regards methods and systems for providing all ofthe services traditionally provided by “prime brokers” to hedge funds,investment companies and other institutional brokerage customers. Thismay be done in a manner that is more direct and transparent, and canresult in lower costs and reduced operating risks to the customers andthe institutions offering these services. This may also be done suchthat the intraday liquidity necessary to provide these products isprovided without the need to reflect these transactions on the balancesheet of a financial institution practicing an embodiment of theinvention.

In one embodiment, investment funds and other qualified institutionalcustomers that utilize both long and short securities positions in theirinvestment strategies (“Long/Short Investment Vehicles”) may be able tocreate short positions needed for these vehicles by borrowing directlyfrom securities lenders with a bank acting as an agent. This may be doneinstead of interposing an additional step of having the customer enterinto a securities borrowing transaction with a prime broker acting asprincipal. By eliminating the prime broker, the cost of borrowingsecurities to cover short positions may be reduced substantially.Embodiments of the present invention may also include systems andmethods that fund long positions in securities by providing directaccess to repurchase agreement markets through a bank acting as agent.In this embodiment as well the additional step of borrowing from a primebroker may be eliminated. In so doing a lower cost of funds may beoffered to the customer. Methods and systems of the present inventionmay also enable agent banks to provide services to customers thatinclude: securities execution services; custody services; consulting;and, administrative, accounting and performance reporting services.

By acting in an agency capacity when creating short positions andfunding long positions for Long/Short Investment Vehicles, the agentbank is able to avoid incurring the regulatory capital charges thatwould apply if the bank, as in the case of a prime broker providingservices to a hedge fund, were to extend credit to the investmentvehicle or enter as principal into other transactions that would appearon the bank's balance sheet.

Numerous systems and methods may embody the present invention includingthose described in this application.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 illustrates a relationship between a prime broker and aLong/Short Investment Vehicle.

FIG. 2 illustrates steps that may be employed in systems and methods ofthe present invention.

FIG. 3 illustrates steps that may be employed in systems and methods ofthe present invention for creating short positions for a Long/ShortInvestment Vehicle.

FIG. 4 illustrates steps that may be employed in systems and methods ofthe present invention for creating long positions for a Long/ShortInvestment Vehicle.

FIG. 5 illustrates a computing system that may be employed in accordwith embodiments of the present invention.

DETAILED DESCRIPTION

As explained in more general detail above, Long/Short InvestmentVehicles that desire to sell short need to borrow the securities thatare the subject of the short sale in a timely and cost-effective manner.Securities lending transactions are the usual method for short sellersto obtain securities for this purpose. Long/Short Investment Vehiclesoften rely on leverage and therefore need to borrow cash to finance thecreation of their long positions. These investment vehicles also requireother services relating to their securities portfolios and trades,including execution and settlement services for trades, securitiescustody services for securities and other assets in the investmentportfolio, and administrative and other support services such asaccounting, fund administration and performance reporting.

As also explained above, hedge funds and similar investment vehiclestraditionally have obtained these services from “prime brokers,” whichhold in custody cash and securities in a centralized master account andact as principal to facilitate securities trades with other marketparticipants. The services typically provided by a prime broker includesecurities lending to facilitate the creation of short positions,financing of long positions, clearance and settlement of securitiestransactions, securities custody, and administrative and other supportservices of the types described above. The services may also includeexecution services. In addition, some prime brokers, at the customer'selection, may provide consulting and advisory services andrisk-management advisory services. In providing securities lending andfinancing services, prime brokers typically act as principal,intermediating themselves between the hedge fund and the ultimatecounterparty in the transaction (e.g., a securities lender or a repoinvestor). That results in a lack of transparency for the hedge fundregarding the transactions effected for its account, and it also resultsin higher fees to the fund and ultimately lower returns for the fund'sinvestors. The intermediation of the prime broker as principal insecurities lending and financing transactions also introduces anadditional layer of operational risk for the customer.

Methods and systems of the present invention may be employed to providefinancial services to Long/Short Investment Vehicles including “130/30”mutual funds, which are funds authorized to invest roughly 130% of theirassets in long positions and to maintain approximately 30% of its assetsin short positions. Systems and methods of the invention may also beused by other investors employing similar or different investmentstrategies.

The present invention may allow Long/Short Investment Vehicles to obtainthe services traditionally provided by prime brokers, but in a moretransparent and cost-effective manner and with reduced operational risk.Utilizing systems and methods of the present invention Long/ShortInvestment Vehicles may be able to create short positions and fund longpositions in securities through transactions effected directly withcounterparties such as securities dealers or other institutionalinvestors with a bank acting as agent. This provides an alternative toreliance on a prime broker and its pricing structure. The methods andsystems of the present invention may also be used by the Long/ShortInvestment Vehicles to obtain ancillary services traditionally providedby prime brokers, including execution and settlement services,securities custody services, and administrative and other supportservices such as accounting, fund administration and performancereporting.

The present invention may allow a commercial bank to replicate theessential services provided by prime brokers for their clients whilealso avoiding the incurrence of most regulatory capital charges thatwould apply if a bank were to loan funds directly to a Long/ShortInvestment Vehicle or enter into other transactions as principal. Suchprincipal transactions, to the extent that they create or areconvertible into assets on a bank's balance sheet, require a bank tomaintain regulatory capital as a percentage of such assets in accordancewith the risk-based capital adequacy rules to which commercial banks aresubject. This benefit may be present in each of the various embodimentsdescribed herein as well as in other embodiments not specificallydisclosed.

In acting as agent rather than as principal in providing services to theLong/Short Investment Vehicle, the agent bank structures and arrangestransactions suiting the Investment Vehicle's needs, which theInvestment Vehicle then enters into directly with a counterpartyidentified by the agent bank. These include securities lendingtransactions arranged by the agent bank in order to create shortpositions for the Long/Short Investment Vehicle, in which the InvestmentVehicle borrows securities directly from a third party securitieslender, with the agent bank extending intraday liquidity and issuing aletter of credit and an indemnity to certain parties In the transactionsin order to allow for the transactions to proceed as direct borrowingsof securities by the Investment Vehicle rather than as borrowings by thebank as principal. The agent bank also arranges securities repurchasetransactions (“repos”) in which the Long/Short Investment Vehicle sellssecurities directly to third party investors identified by the agentbank, subject to an obligation to repurchase at the termination date ofthe repo, as a means of funding the creation of long positions for theInvestment Vehicle. This is in contrast to the method by which primebrokers fund long positions of their hedge fund clients, in which theprime broker itself enters into repo transactions as principal and thenlends the funds raised to the hedge fund client.

FIG. 1 illustrates a relationship between a prime broker 110 and aLong/Short Investment Vehicle 112 as described above. The prime broker110, which is typically an investment bank or other securitiesbroker-dealer, acts as principal (i.e., “utilizing balance sheet”) intransactions with the Long/Short Investment Vehicle 112.

As shown at 114, short positions may be created for the Long/ShortInvestment Vehicle by the prime broker lending to the Vehicle securitiesthat the prime broker owns or that it has borrowed from a third partysecurities lender. In the latter case, as shown at 116 and 118, thethird-party securities lender from which the prime broker obtains thesecurities is typically acting as agent in lending securities owned byits customer, the security holder. The Long/Short Investment Vehiclethen utilizes the securities execution services of the prime broker oranother broker to execute short sales of the securities. This is shownat 120.

As shown at 122, the prime broker may also lend cash to the Long/ShortInvestment Vehicle to finance the purchase of long positions insecurities. In order to raise funds to be on-lent to the Long/ShortInvestment Vehicle, the prime broker may enter into repos with one ormore third-party investors, as shown at 124 and 126, in which the primebroker sells securities to an investor for cash and the prime brokeragrees to repay the purchase price, plus interest, in exchange for thereturn to or repurchase from the investor of the same securities. Thefunds raised by the sale of those securities are then lent by the primebroker to the Long/Short Investment Vehicle, which utilizes them tofinance the purchase of securities for its investment portfolio as shownat 128. The Long/Short Investment Vehicle then utilizes the securitiesexecution services of the prime broker or another broker to affect thosesecurities purchases.

As shown at 130, the prime broker may also arrange for third-partyservicers to provide the Long/Short Investment Vehicle with securitiescustody, accounting, fund administration, consulting and performancereporting services.

There is a lack of transparency in these traditional prime brokerarrangements, with the prime broker acting as intermediary between theLong/Short Investment Vehicle and the third party securities lenders (inthe case of the creation of short positions) or the third-party repoinvestors (in the case of the financing of long positions). This lack oftransparency, along with the intermediation of the prime broker asprincipal, may result in higher fees to the Long/Short InvestmentVehicle in the creation of short positions and the funding of longpositions. The interpositioning of the prime broker as principal mayalso increase operational risk for the Long/Short Investment Vehicle, asthe addition of the prime broker as a party to the transactions addsanother possible source of operational problems or delays.

FIG. 2 illustrates steps that may be employed in systems and methods ofthe present invention. Here, a bank 210 may facilitate the borrowing bya customer, in this case a Long/Short Investment Vehicle, of securitiesfor short sales through securities lending. The bank 210 may furtherfinance the Vehicle's long positions through repo transactions. In eachcase, systems and methods may be employed that allow the bank 210 to actas an agent rather than require a third-party prime broker to act in thecapacity of a principal.

As shown in FIG. 2, short positions may be created for the Long/ShortInvestment Vehicle 220 through direct borrowings by the Vehicle 220 fromthe third-party securities lender 240 in transactions arranged by bank210 and in which the bank 210 may indemnify the securities lenderagainst risk of loss due to any failure by the Vehicle 220 to return theborrowed securities. In contrast to the manner in which prime brokerscreate short positions for hedge fund clients, the facilitation by thepresent invention of direct securities borrowings by the Long/ShortInvestment Vehicle 220 from the third-party securities lender may allowfor greater transparency, the elimination or reduction of hidden costsand fees and improved operational efficiency. Those transactions and therole of the agent bank in them are discussed in more detail below inconnection with FIG. 3.

The Long/Short Investment Vehicle's 220 long positions may be financedby tri-party repo transactions entered into by the Vehicle directly withone or more investors. A tri-party repo differs from a bilateral repotransaction by having as a third party to the governing agreement acustodian bank that acts as agent to both parties, safeguards thesecurity before the investor's repurchase and agrees to protect theinterests of one party in the event of default by the other. A bankagent 210 in accord with the present invention may arrange thesetri-party repos and provides related services. As in the case of thecreation of short positions, the facilitation by the invention of directaccess by Long/Short Investment Vehicles to repo markets allows longpositions to be financed in a more transparent, cost-effective andoperationally efficient manner. These transactions and the role of theagent bank 210 practicing the present invention are discussed in moredetail below in connection with FIG. 4.

The present invention may also allow for the provision by an agent bankto the Long/Short Investment Vehicle, at the Vehicle's option, ofadditional services of the types traditionally provided to hedge fundsand similar investment vehicles by prime brokers. Long purchases 270 andshort sales 270 of securities by the Long/Short Investment Vehicle canbe executed by the agent bank or an affiliate of the agent bank. TheLong/Short Investment Vehicle can also obtain securities custody,accounting, fund administration, consulting and performance reportingservices from other units or affiliates of the agent bank, utilizingmethods and systems of the present invention.

FIG. 3 illustrates transactions and steps that may be used in systemsand methods of the present invention to create short positions for aLong/Short Investment Vehicle. Here, a Long/Short Investment Vehicle 320may pay liquidity, letter of credit and Platform fees to an agent bank310. The agent bank 310 may then extend funds on an intraday basis(intraday liquidity) to, and issues a letter of credit (to cover themargin for the securities to be lent to create the short position) forthe benefit of, the agent lender 330. The agent lender 330 may beanother bank or broker-dealer acting as an agent for its customer, whichis the “securities lender” 340 (i.e., the owner of the securities 360 tobe lent). The agent lender 330 may then provide the securities 360 whilethe agent bank 310 may indemnify the securities lender 340 against therisk of loss resulting from any failure by the Long/Short InvestmentVehicle 320 to return the securities 360.

The securities 360 may then be delivered to the Long/Short InvestmentVehicle's custodian, which can be the bank agent 310 or another bank orbroker-dealer. The securities 360 may then be sold to another marketparticipant 350, either by an affiliate of the agent bank 310 or athird-party broker-dealer. This may create a short position in thesecurities 360 for the Long/Short Investment Vehicle 320.

The cash generated by the sale of the securities 360 may thentransferred to the agent lender as collateral for the securities lendingtransaction. Under the governing agreement for the securities lendingtransaction, the agent lender 330 may then be responsible for investingthe cash collateral in the manner specified by the agreement.

At the expiration of the securities lending transaction, the agentlender 330 may disburse the bulk of the return on the investment of thecash collateral to the securities lender in the form of a borrowing fee.It may also rebate the cash collateral, together with a portion of thereturn on the investment of the cash collateral, for the Long/ShortInvestment Vehicle. Credits may then be made to the custody account ofthe Long/Short Investment Vehicle, either at the agent bank (where theagent bank 310 is serving as the securities custodian for the Vehicle)or another bank or broker-dealer. The agent lender 330 is alsocompensated for its services in the securities lending transaction by asecurities lending fee paid from the return on the investment of thecash collateral.

FIG. 4 illustrates the steps that may be involved by the invention tofinance long positions for Long/Short Investment Vehicles 410 in accordwith the invention. As an initial step, the Long/Short InvestmentVehicle 410 may provide collateral, typically in the form of U.S.Treasury securities or similar securities, to the bank agent 420. Thecollateral may then be transferred by the bank agent to the Tri-PartyRepo system 430. This system 430 may administer repo transactions formajor market participants and other institutional investors. TheTri-Party Repo system 430 would create and segregate pools of collateralfor sale to market participants. The participants would act aspurchasers in the repo transactions (“collateral takers”).

The Tri-Party Repo system 430 would sell the collateral pools to one ormore collateral takers 440 in accord with the invention. In accord withthe invention, Long/Short Investment Vehicles would be obligated torepurchase the collateral on the termination date for the repo at thesame price at which the collateral was sold and to pay interest for theuse of funds at an agreed-upon rate (the “repo rate”). The purchaseprice for the collateral pools sold to the collateral takers would bereturned by the Tri-Party Repo system to the agent bank 420.

If the agent bank is serving as the securities custodian for theLong/Short Investment Vehicle, the funds may be credited by the agentbank to the Vehicle's custody account, and the funds may then be used bythe Long/Short Investment Vehicle to purchase long positions insecurities from securities'sellers. Those securities purchases may thenbe executed by an affiliate of the agent bank for the account of theLong/Short Investment Vehicle.

If a bank other than the agent bank or a broker-dealer is serving as theLong/Short Investment Vehicle's securities custodian, then the fundsreceived for the sale of the collateral pools may be delivered by thesystem carrying out this step to the Vehicle's custodian for use ineffecting the securities purchases. These may be executed through athird-party broker-dealer.

FIG. 5 is a computer network that may be employed in accord withembodiments of the present invention. This network may include two ormore server 520 and numerous workstations 510 connected to each otherover a network. The servers may each be associated with one of an agentbank, a vendor of investment securities, and an investment fund seekingto purchase the investment securities. The servers may be incommunication with each other to generate and exchange instructions thatmay carry out and execute the methods described herein. These methodsmay be carried out in the same order as described herein and may becarried out in other orders as well. In embodiments of the invention theinstructions to purchase may be generated at a workstation at theinvestment fund, processed through a server at an agent bank, and thenbe received at a server associated with the vendor. At each location, areview and approval of the transaction may be conducted at a workstationlocated at the applicable financial institution. For example, aworkstation at the bank may require that transactions larger than presetlimits be approved by an official having certain authority and thatuntil the transaction is approved, the server at the bank will notrequest that the transaction be forwarded to a vendor of the securityinterest being requested.

Various embodiments of the invention may include hybrid trading systemsin addition to a completely automated trading system. This hybrid systemmay include completely automated portions and portions that requiremanual intervention. For instance, a trading desk at a financialinstitution may act as an intermediary between electronic tradingsystems to complete financial transaction in accord with the currentinvention. The traders may, when practicing embodiments of theinvention, make intraday entries to account for the liquidity necessaryto satisfy the long and short transactions processed by the traders. Itsome embodiments, it is at this manual step that the bank would beacting as an agent to facilitate a short position or other financialvehicle in order to satisfy the request of a customer.

Various embodiments of the present invention are provided herein. Otherembodiments in addition to these are also possible. Moreover, thepresent invention may also be embodied by methods carrying out some orall of the steps provided herein in the described order as well as inother orders. Further these steps may include additional steps and onlya portion of the described steps.

What is at least claimed is:
 1. An investment vehicle, comprising: longinvestment positions of tradeable investments; and short investmentpositions of tradeable investments, wherein a first financialinstitution serves as an agent for a manager of the investment vehiclewhen obtaining at least one of the long investment positions or theshort investment positions in the investment, and wherein the firstfinancial institution extends a letter of credit to a second financialinstitution when obtaining at least one of the investment positions inthe investment.
 2. The investment vehicle of claim 1 wherein the firstfinancial institution is a bank and the manager of the investmentvehicle is a hedge fund.
 3. The investment vehicle of claim 1 whereinthe first financial institution also acts to indemnify a lender of asecurity associated with at least one of the short investment positions.4. The investment vehicle of claim 1 wherein the first financialinstitution, acting on behalf of the manager of the investment vehicle,purchases treasury notes at a first point in time for a purchase priceand sells treasury notes at a later point in time at a sale price, thesale price being larger than the purchase price.
 5. The investmentvehicle of claim 1 wherein the value of the long positions of tradeableinvestments is up to about 130% of assets, and wherein the value of theshort positions of tradeable investments is approximately 30% assets. 6.An investment vehicle comprising: long investment positions of tradeableinvestments; and short investment positions of tradeable investments,wherein prime broker services for the investment vehicle are provideddirectly from an agent bank to financial institution without theintervention of a third-party prime broker.
 7. The investment vehicle ofclaim 6 wherein the long positions of the tradeable investments aregreater than 100% of the market value of the investment vehicle.
 8. Theinvestment vehicle of claim 6 wherein the short positions of thetradeable investments are equal in value to the amount that the longpositions exceed 100% of the market value of the investment vehicle. 9.The investment vehicle of claim 6 wherein the value of the longpositions of tradeable investments is 130% of the value of theinvestment vehicle and wherein the value of the short positions oftradeable investments is 30% of the value of the investment vehicle. 10.A computer-implemented method of providing a financial service over anetwork, the method comprising: receiving via the network, and in aprocessor at an agent bank, an instruction from an investor, theinstruction being associated with an account of the investor andincluding a request to purchase a security interest in an identifiedinvestment vehicle from a vendor of an investment vehicle; associatingthe instruction from the investor with an account of the agent bank;after processing the instruction from the investor received at the agentbank, generating an instruction at the agent bank comprising a requestthat the vendor of the investment vehicle create a short position inthat account for the investment vehicle; and sending the instructiongenerated at the agent bank to the vendor of the investment vehicle viathe network.
 11. An investment vehicle, comprising: long investmentpositions of tradeable investments; and short investment positions oftradeable investments, wherein a first financial institution served asan agent for a manager of the investment vehicle when obtaining at leastone of the long investment positions or the short investment positionsin the investment, and wherein the first financial institution extendedcapital when obtaining at least one of the long investment positions orthe short investment vehicles without making a concurring balance sheetentry that affects the amount of capital the first financial institutionmust maintain as a percentage of assets.
 12. The investment vehicle ofclaim 11 wherein the first financial institution is a bank and themanager of the investment vehicle is a hedge fund.
 13. The investmentvehicle of claim 11 wherein the first financial institution also acts toindemnify a lender of a security associated with at least one of theshort investment positions.
 14. The investment vehicle of claim 11wherein the first financial institution, acting on behalf of the managerof the investment vehicle, purchases treasury notes at a first point intime for a purchase price and sells treasury notes at a later point intime at a sale price, the sale price being larger than the purchaseprice.
 15. The investment vehicle of claim 11 wherein the value of thelong positions of tradeable investments is up to about 130% of assets,and wherein the value of the short positions of tradeable investments isapproximately 30% assets.